Notwithstanding some isolated (but rapidly dwindling) agreement that Merck is following a sound business policy in not attempting to negotiate a global Vioxx settlement, most financial and legal experts are now convinced of the imprudence of that strategy.

The same jury that awarded $4.5 million in compensatory damages against Merck only last week, has now returned an additional $9 million punitive damage award in the same New Jersey case.
While the award of significant amounts of compensatory damages is serious enough, it pales in comparison to the implications associated with an assessment of punitive (or Ã¢â‚¬Å“exemplaryÃ¢â‚¬Â) damages.

Some of the more problematic issues raised by an award of punitive damages are:

Exemplary damages are designed to punish a defendant and discourage similar conduct in the future. They are not meant to compensate the plaintiff. Thus, unless limited by statute, they are a function of a defendantÃ¢â‚¬â„¢s financial profile.

Even where a state limits the size of a punitive damage award, the amount is still considerable greater than simple compensatory damages. Thus, in New Jersey, where punitive damages are limited to a maximum of five times the amount of compensatory damages, the exposure a defendant is subject to is considerable. In the current case, exemplary damages could have been as high as $22 million. (The $229 million punitive damage award against Merck in Texas, even when reduced, meant the total award would still be $26 million.)

Punitive damages carry with them a finding of conduct that is far more onerous than that of simple negligence. Depending on the state, definitions of the type of conduct that justifies the imposition of punitive damages include such terms as willful, wanton, and reckless among others.

Some states, like New Jersey have statutes that require cases where punitive damages are awarded to be referred to prosecutorial agencies for investigation into whether any crimes were committed. In New Jersey, the statute states: Ã¢â‚¬Å“2A:15-5.17. Record referred for criminal investigation Ã¢â‚¬Â¦Upon the conclusion of any action in which punitive damages have been awarded, the court shall refer the record of that action to the prosecutor of the county in which the case was tried and to the Attorney General for investigation as to whether a criminal act has been committed by the defendant.Ã¢â‚¬Â

Punitive damages are not covered by insurance. The exclusion is based on the twofold reasoning that (a) the conduct is tantamount to an intentional act on the part of the insured, and (b) the intent of punitive damages would be thwarted if a defendant could insulate itself from paying such an award simply by buying more insurance.

Any company exposed to as many lawsuits as Merck faces over Vioxx will quickly run out of any Ã¢â‚¬Å“war chestÃ¢â‚¬Â that it has set aside to cover litigation costs. Merck set aside $970 million for such costs; however, only two punitive damage awards have already eroded that fund by several million dollars. At this rate, Merck would only be able to withstand one or two hundred such awards at best. Since there are some 10,000 additional cases pending, there is simply no way Merck can pay the full number of potential punitive damage awards without suffering a financial collapse.

Since Merck has now had the opportunity to fully litigate the issue of its conduct with respect to the marketing of Vioxx and has been found liable for punitive damages, the issue may not be re-litigated again and again by Merck in the hope of getting other juries to find differently. While compensatory damages vary from case to case and must be proven by each plaintiff in addition to proving causation, the underlying basis for finding a defendant liable for punitive damages may not. If the conduct is the same, as it is in the case of Vioxx, then all that will vary is the amount of the punitive damages.

Punitive damages make for a serious issue vis-ÃƒÂ -vis a companyÃ¢â‚¬â„¢s shareholders who will have a basis for a derivative lawsuit seeking damages for conduct by the company that compromised the value of the shareholdersÃ¢â‚¬â„¢ investments. (Shareholders of Elan, the manufacturer of the embattled MS drug Tysabri just released its 2005 Annual statement that revealed its shareholders have already commenced derivative suits accusing it of fraud and other wrongdoing that compromised the value of that companyÃ¢â‚¬â„¢s stock value.)

In the latest Vioxx trial, the jury was asked the following questions and gave the following answers:

Q: Has the plaintiff proved by clear and convincing evidence that Merck knowingly withheld or misrepresented information required to be submitted to the FDA under the FDA regulations which information was material and relevant to the harm in question?
A: Yes.

Q: Has the plaintiff proven by clear and convincing evidence that Merck’s actions show a wanton and willful disregard of another’s rights so as to justify an award of punitive damages?
A: Yes.

Q: What amount, if any, of punitive damages should be awarded?
A: $9 million.

Ever since Merck (through its attorneys) announced its litigation position was to try every Vioxx case to verdict, rather than settle any of them, most legal and financial experts have questioned the soundness of the strategy. Now, more than ever, that policy seems fatally flawed.

While forcing plaintiffs to prove their cases (on liability and damages) is a viable strategy when a Ã¢â‚¬Å“deep pocketÃ¢â‚¬Â defendant is faced with one, or no more than a few, serious cases, the wisdom of a Ã¢â‚¬Å“damn the torpedoes, full speed aheadÃ¢â‚¬Â approach becomes shaky at best when the number of cases is in the thousands.

MerckÃ¢â‚¬â„¢s problem is that three virtually insurmountable obstacles are simultaneously pushing the company toward a financial catastrophe.

In addition to some 10,000 unresolved personal injury and wrongful death claims, Merck also faces a massive class-action brought by drug plans and insurance carriers that could expose the company to a treble damage, multi-billion dollar verdict.

There is also the matter of state Medicare claims that also expose Merck to billions of dollars more in potential verdicts.

Thus, for MerckÃ¢â‚¬â„¢s Ã¢â‚¬Å“no payÃ¢â‚¬Â strategy to have had any chance of success, the pharmaceutical giant would have had to win virtually every one of the 10,000 individual cases and then to have hoped that such success would serve to defeat the claims by Medicare and healthcare plans.

The fundamental flaw in MerckÃ¢â‚¬â„¢s defiant position, however, has always been that there are simply too many cases, both in number and type, to justify it.

It should not have come as a surprise to Merck to find itself in the serious predicament it now faces.Ã‚Â Merck can take the position that it was always concerned with safety and that it only pulled Vioxx off the market after there was evidence that a cardiovascular risk existed, but the mountain of evidence is clearly to the contrary.

In fact, even Merck admits that long-term Vioxx users (over 18 months) were specifically vulnerable to an increased risk of cardiovascular problems.

Thus, the thousands of cases involving such plaintiffs were, at best, a toss-up regardless of how impaired the patientsÃ¢â‚¬â„¢ health was – separate and apart form the complications alleged to have been the result of Vioxx use.

The short-term use cases, although more easily defended, still had a significant risk of failure associated with them because many of those plaintiffs were otherwise healthy.

There was also the truism, which Merck apparently chose to ignore, that, out of thousands of cases, different juries, in different places, presented with different evidence will render different verdicts.

Merck also failed to appreciate the fact that each case it won was not in any way the equivalent of each case it lost. Wins were merely dust in the wind, while losses were nails in its coffin.

Each win was still an expensive, time-consuming exercise from which remaining plaintiffs and their attorneys could learn. Each loss was equally expensive and time consuming; however those outcomes also carried with them hefty damage awards and potential appeals.

Between the huge number of losses Merck had to realize it would face in the personal injury and death cases (unless the company and its attorneys were completely out of touch with reality and living in a state of total denial), the private third-party health benefits plans class-action, and the state Medicare lawsuits, MerckÃ¢â‚¬â„¢s exposure could actually soar to the astronomical figures of $20 to $50 billion (or more) once predicted by legal and financial analysts.

Such amounts could easily exceed MerckÃ¢â‚¬â„¢s insurance coverage and financially cripple the worldÃ¢â‚¬â„¢s fifth largest drug maker. They could hamper product development as well as MerckÃ¢â‚¬â„¢s ability to partner with smaller companies in joint ventures.

There is now the additional factor of punitive damage awards based on MerckÃ¢â‚¬â„¢s willful marketing of Vioxx notwithstanding its awareness of the increased risk of heart attacks and the mountain of evidence that it may have manipulated, withheld, and even tampered with clinical study results are not covered by insurance and would have to be paid directly by Merck.

Merck would have to win most of the remaining 10,000 or so cases to stave off a financial catastrophe since each negative verdict has the potential of being in the millions of dollars. Even scattered losses for Merck can add up to a financial disaster.

As Sherwood Small, a fund manager with Boston Private Value, was quoted as saying after the liability and compensatory damage verdicts: Ã¢â‚¬Å“There’s no way that (Merck) is going to continue to pursue this strategy of trying every case. It would be foolhardy and very expensive. This (split verdict) doesn’t put Merck in a great position.”

Since previous trials involved short-term use, Merck had been able to argue that there was no evidence of increased heart risk associated with such use of Vioxx. In this case, however, that Ã¢â‚¬Å“defenseÃ¢â‚¬Â was unavailing since long-term use was involved.

Future cases where long-term use is the issue will likely follow the same scenario since the study that led to the withdrawal of the drug from the market showed Vioxx doubled the risk of heart attack and stroke among people who used it for at least 18 months.

Merck may win some of these cases where the plaintiffs had significant collateral health problems; however, it must be prepared now to lose the bulk of the Ã¢â‚¬Å“long-term useÃ¢â‚¬Â trials.

Even if only half of the cases involve long-term use and only half of those are successful the resulting 2,500 verdicts could be in excess of $11 billion. Given the first verdict of $253 million (that will ultimately be reduced to about $26 million) and the possibility of significant punitive damage awards, the $11 billion figure is conservative.

The class-action that would include all non-governmental health plans that paid for members’ Vioxx prescriptions alleges that Merck misrepresented the safety profile of the expensive painkiller, ignoring clear and early warning signs of its risks in order to continue its sale.

The health plans contend that, had they been properly informed of the facts, they would not have included Vioxx on their lists of approved medicines or agreed to reimburse their members for its high cost.

Many experts and consumer advocates maintain that in addition to its higher risk for heart-related problems, Vioxx (and the other COX-2 inhibitors, Celebrex and Bextra) were no more effective than far less expensive painkillers already on the market.

In seeking reimbursement for medical plan payments, the plaintiffs will not have to prove Vioxx caused any specific personal injuries or deaths. All that the plans would have to prove is that Merck continued to push the sale of Vioxx after it was aware of the increased cardiovascular risks the drug posed.

In this regard, there is an enormous amount of evidence in terms of internal Merck documents, clinical tests, expert testimony, and damaging proof of altered data that would be difficult for a jury to disregard with respect to the claims involved in the class-action (as opposed to the personal injury actions where medical causation is also required).

Moreover, the damages involved in the class-action are massive. The potential $30 billion downside risk in one single verdict is a sobering reminder to Merck that a financial disaster is looming on the horizon.

The companyÃ¢â‚¬â„¢s case by case approach to defending thousands of personal injury suits would not be of any benefit in the class-action. The 2005 Class Action Fairness Act, which moves most interstate class-actions into federal courts, does not apply here since the Vioxx third-party-payor suit was filed in 2003. Thus, that case will remain in New Jersey state court.

The state-government actions that are similar to the class-action and seek reimbursement (and penalties) for prescription benefits paid for Vioxx through state-run Medicare programs.

Texas alone is seeking $168 million in damages and additional civil penalties. Texas Attorney General, Greg Abbott, believes the state can prove total damages in excess of $250 million including treble (triple) reimbursement of $56 million (or $168 million) for five years of filled Vioxx prescriptions.

It is estimated that 700,000 Vioxx prescriptions were filled through Medicaid during those five years in Texas alone. Abbott sees these prescriptions as part of a willful misrepresentation on MerckÃ¢â‚¬â„¢s part as to the safety of the drug. To him, the entire affair represents nothing more than Ã¢â‚¬Å“a prime example of a companyÃ¢â‚¬â„¢s drive for profit steamrolling its duty to be safe.Ã¢â‚¬Â

While the Vioxx personal injury and wrongful death lawsuits are far more dramatic, it may be the rather dry health-plan and Medicare reimbursement actions that bring down Merck. One attorney familiar with the litigation told us that, in a way, Ã¢â‚¬Å“the class- and Medicare-actions, if successful, would be similar to bringing down the notorious Al Capone on nothing more than the rather dull charge of income tax evasion.Ã¢â‚¬Â

Thus, when the personal injury, death, punitive damage, class-action, and Medicare lawsuits are considered together, damages could easily exceed $50 billion and could even approach the once unimaginable estimate of some analysts of $80 billion.

Clearly, the time has come for Merck to re-evaluate its position at least with respect to a global settlement of the more viable personal injury and wrongful death cases involving long-term Vioxx users. As one attorney familiar with the litigation put it: Ã¢â‚¬Å“To keep avoiding any settlement discussions is no longer a viable option for Merck. We are not talking about aging a fine wine here. The delay could spell financial disaster for Merck no matter how big a company it is.Ã¢â‚¬Â

It also appears that Judge Higbee, who presides over some 5,000 Vioxx cases in New Jersey, is interested in forcing Merck into seriously reconsidering its position and entering into some sort of global settlement to resolve all, or at least a significant number of the pending cases before her.